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Strategy Series, Part 5: Day Trading Reversals

Strategy Series, Part 5: Day Trading Reversals

2015-01-27 19:21:00
Walker England, Forex Trading Instructor
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Talking Points:

  • Day Trading can Offer Multiple Daily Positions
  • Camarilla Pivots can Determine Intraday Support & Resistance
  • Reversal Ranges Offer Clear Areas to Manage Risk

Day trading is a popular approach to Forex trading; with many strategies available traders have the opportunity to take multiple positions each day. This can allow traders that don’t wish to hold for the long term to take advantage of intraday market moves, between lines of support and resistance. Today we will continue our conversation on strategies, by reviewing trading intraday reversals with the “DT Pivot” strategy. Let’s get started!

Not a day trader? In our previous strategy session, we reviewed position trading long term breakouts with the “HI-Low” strategy. Learn more using the link below.

Learn More about Daily Breakouts HERE

Learn Forex – USDCAD Reversal Range

Strategy Series, Part 5: Day Trading Reversals

Pivots for Support & Resistance

Markets are prone to turn at existing points of support and resistance, so the first step is to identify these points on your chart. To simplify the process, for today’s “DT Pivot” strategy, we will be adding camarilla pivots to the chart. These lines are calculated using percentages of the previous day’s trading range which, when added to the graph, creates a clear idea of where price may be supported or reach a barrier of resistance.

As seen above, Camarilla Pivots label resistance lines R1-R4, and support lines S1-S4. R4 and S4 are considered extremities in price—demoting a breakout. Traders looking for short term reversals should focus on price movements between the S3 and R3 pivots. This is known as the trading range, and can afford traders short term day trading possibilities if price stays between these values. Let’s look at how a short term turn in the market can be traded.

Learn Forex – USDCAD Range Entry and Target

Strategy Series, Part 5: Day Trading Reversals

Trading Range Reversals

Now that support and resistance have been identified, through the use of camarilla pivots, traders can begin planning their entry. The key is to sell the market at resistance. This can be done once price has touched the R3 pivot and a 30 minute bar closes inside the pivot range. Conversely, traders should look to buy the market after price touches the S3 pivot, but only after a 30 minute bar closes inside the pivot range. Since candle confirmation is used with the “DT Pivot”strategy, traders can enter into a trade using market orders.

Above we can see several sample entries using this order logic. First, Entry 1 would be considered after the first highlighted wick passes through the R3 line of resistance. However, execution would not occur until the bar closed inside of the range on the 30 minute chart. At this point traders would look to sell the market in anticipation of a reversal back to support. For Entry 2 the same rules apply, however traders will look to buy at support. After price tests the s3 pivot, and price closes inside of the range, traders will execute a new buy position. Once a trade is entered it is time to plan the exit strategy.

Learn Forex – USDCAD Stop Placement

Strategy Series, Part 5: Day Trading Reversals

Stop and Limit Orders

Traders should always have a plan for managing their position. Eventually the range will come to an end and any existing trades should be exited. When initiating a buy order, stop orders should be placed at the S4 pivot. That way if prices break to a lower low, all buy trades will be closed. Conversely if a trader is selling resistance at the R3 pivot, stops can be placed at the R4 pivot as seen above.

When it comes to profit targets, the “DT Pivot” reversal strategy looks for a full extension of the range. This means if you are selling resistance at the R3 pivot, your take profit point will be the S3 pivot. Conversely, if you buy at the S3 pivot, traders will target range resistance at the R3 pivot. Using pivots for these orders will allow traders using the “DT Pivot” strategy, to achieve close to a 1:2 Risk/Reward profile on most positions.

Learn More

The “HI-Low Breakout” position trading strategy is just one installment of an ongoing article series on market strategies. If you missed one of the previously mentioned strategies, don’t worry! You can catch up on all of the action with the previous articles linked below.

Strategy 1: Trading Inside Bars with OCO Orders

Strategy 2: The Easy MAC

Strategy3: The CCI Swing

Strategy 4: The HI-Low Breakout

Strategy 5: Day Trading Market Reversals

Strategy 6: Trend Trading with ADX

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter @WEnglandFX.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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